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2001 Prentice Hall Business

Publishing Financial Accounting,4/e Harrison & Horngren1

FUNDAMENTALS OF

ACCOUNTANCY

MODULE1

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INTRODUCTION Accounting is as old as money itself.

"Double Entry System was developed in Italy in

the 15th Century.

The first known description of the system waspublished there in 1494 by a Franciscan monk

by the name Luca Pacioli.

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Industrial Revolution increased the

necessity of the accounts

Accounting is aptly called the language ofbusiness

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A recent study conducted in United States revealed

that the most common background of chief

executive officers in United States corporations wasfinance and accounting. Interviews with several

corporate executives drew the following comments.My training in accounting and auditing practice has been extremely

valuable to me throughout.

"Knowledge of accounting carries with it understanding of the establishment

and maintenance of sound financial controls- an area which is absolutely

essential to a chief- executive officer."

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Accounts is needed ??... To know the profit or loss

To know the financial position

To know

the financial soundness

To make financial decisions

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DEFINITION OF ACCOUNTING

Accounting has been defined by the

American Accounting Association

Committee as the process of identifyingmeasuring and communicating economic

information to permit informed judgments

and decisions by users of the information.

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Definitions of AccountingAccounting has been defined by the

American Accounting Association

Committee as the process of identifyingmeasuring and communicating economic

information to permit informed judgments

and decisions by users of the information.

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The American institute of certified and public

accountants committee on terminology defined

accounting in 1961 as: accounting is the art of

recording, classifying and summarizing in asignificant manner and in terms of money

transaction and events which are, in part at least

of financial character and interpreting the results

thereof.

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ACCOUNTING - THE BASIS

OF DECISION MAKINGAccounting is the language of business

Accounting is the information system that

Measures business activities

Processes that information into reports

Communicates the results to decision makers

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THE ACCOUNTING SYSTEM:

THE FLOW OF INFORMATION

1. People make decisions

2. Business transactions occur

3. Businesses prepare reports to show theresults of their operations

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ACCOUNTING VS.

BOOKKEEPING Bookkeeping is the procedural element

of accounting that processes the

accounting data

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Individuals

Businesses Investors and Creditors

Government Regulatory Agencies

Taxing Authorities

Nonprofit Organizations

DECISION MAKERS WHO USE

ACCOUNTING INFORMATION

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ACCOUNTING PRINCIPLES

AND CONCEPTS Generally accepted accounting principles

(GAAP) are

The rules that govern how accountants

operate

Based upon a conceptual framework written

by the Financial Accounting Standards Board(FASB)

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AND CONCEPTS The FASB works with the SEC (Securities

and Exchange Commission) and the

AICPA (American Institute of CertifiedPublic Accountants)

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ACCOUNTING CONCEPTS

Money Measurement Concept.

Business Entity Concept.

Going Concern Concept.

Cost Concept. Dual Aspect Concept.

Accounting Period Concept.

Matching Concept.

Realization Concept: Accrual Concept.

Objective Evidence Concept.

Legal aspect concept

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AND CONCEPTS The entity concept

States that an organization is an

economic entity that keeps its affairsseparate from those of the owner(s)

The reliability (objective) principle

States that accounting records andstatements are based on the most reliabledata available and documented by objectiveevidence

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AND CONCEPTS The cost principle

States that acquired assets and services

should be recorded at their actual (historical)cost and should maintain that historical cost

for as long as they are owned

The going-concern concept States that the entity will remain in operation

for the foreseeable future

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AND CONCEPTS DUAL ASPECT CONCEPT: This is the

basic concept in -accounting. Every

transaction has two aspects namely (a)the receiving aspect and (b) the giving

aspect.

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ACCOUNTING CONVENTIONS

Convention Of Materiality Convention Of Conservatism

Convention Of Consistency

Convention Of Full Disclosure

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Convention Of Materiality

This convention means that in accounting

a detailed record is made of only those

business transactions which are material(i.e. important). Material means significant.

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Convention Of Conservatism

According to this convention Financial

Statements are drawn up conservatively.

Showing a position better than what is or showing a dismal picture, though the

position is good, is not permitted.

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Convention Of Consistency

The convention of consistency signifies

that the accounting practices and methods

should remain consistent (i.e., unchanged)from one accounting year to another.

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Convention Of Full Disclosure

The convention of full disclosure means,

that all material facts must be disclosed in

the financial statements.

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THE ACCOUNTING EQUATION The accounting equation presents the

resources of the business and the claims

to those resources

Economic Resources = Claims to Economic Resources

Assets = Liabilities + Owners Equity

or

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INFORMATION REPORTED

ON THE FINANCIAL

STATEMENTS

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INCOME STATEMENT

The income statement (statement of

earnings) reports the companys

revenues, expenses, and net income ornet loss for the period

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A IR & S E A T R A V E L , IN C .In c o m e S t a te m e n t

M o n t h E n d e d A p r il 3 0 , 2 0 0 1

R e v e n u e :S e r v ic e r e v e n u e $ 8 ,5 0 0

E x p e n s e s :S a la r y e x p e n s e $ 1 ,2 0 0R e n t e x p e n s e 1 ,1 0 0U t i l i t ie s 4 0 0T o ta l e x p e n s e s 2 ,7 0 0

N e t In c o m e $ 5 ,8 0 0

INCOME STATEMENT

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Revenues are

Increases in retained earnings from delivering

goods or services to customers or clients

Expenses are

Decreases in retained earnings that result

from operations

INCOME STATEMENT

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Expenses include

Cost of goods sold (cost of sales)

The cost of the goods that a company sold to itscustomers

Operating expenses

The costs of operating the business

INCOME STATEMENT

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Operating expenses

Advertising

The cost to promote the companys products

Depreciation The expense of using company-owned buildings,

equipment, and furniture

Other operating expenses

The costs of salaries, utilities, rent, and supplies Interest expense

The cost of borrowed money

INCOME STATEMENT

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BALANCE SHEET

The balance sheet (statement of financial

position) reports the companys assets,

liabilities, and owners equity

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BALANCE SHEET

Liabilities Rs. Assets Rs.

Equity Share Capital (5000shares of Rs.lOO each) 5,00,000 Goodwill 30,000

Reserve Fund 1,00,000 Building 3,00,000P & LAIc 50,000 Machinery 2,70,000

10% debentures 2,00,000 Investments 1,50,000

Creditors 1,00,000 Stock 2,00,000

Dividend Provision 50,000 Debtors 60,000

Tax Provision 50,000 Cash 40,000

10,50,000 10,50,000

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ASSETS

Current assets are Those assets which the company expects to

convert to cash, sell, or consume during the next12 months orwithin the business's normaloperating cycle if longer than a year

Current assets include Cash

Accounts receivable

Merchandise inventory

Prepaid expenses

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ASSETS

Long-term assets are

Those assets which the company expects to

hold longer then the next 12 months or thebusinesss normal operating cycle if longer

than one year

Long-term assets include Property

Equipment

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ASSETS

Intangible assets are

Those with no physical form

Trademarks

Patents

Other assets are

Those with small values which do not fallwithin any other standard asset category

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LIABILITIES

Current liabilities are

Debts payable within one year orwithin the

businesss normal operating cycle if longer than a

year Current liabilities include

Notes payable, short term

Accounts payable

Accrued expenses payable

Income taxes payable

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LIABILITIES

Long-term liabilities are

Debts not payable within one year orwithin

the businesss normal operating cycle iflonger than a year

Long-term liabilities include

Notes payable, long term Bonds payable

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OWNERS EQUITY

Owners equity

Represents the shareholders ownership of

the assets of the business

Owners equity of a corporation consists

of

Common stock Retained earnings

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END OF CHAPTER 1

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